How Student Loans Affect Debt To Income Ratio In Mortgage Process
This BLOG On How Student Loans Affect Debt To Income Ratio In Mortgage Process Was UPDATED On January 4th, 2018
Tuition for colleges, universities, technical schools, and specialty schools have sky rocketed. It is almost impossible for anyone to get a higher education and degree without the access of student loans.
- Tuition and fees at most private universities average $50,000 per year and $30,000 for state universities
- With the high unemployment rate and underemployment rate, many recent graduates struggle finding work in their fields
- A large percentage of them find jobs that is totally not related to their field of studies
- Most of those who have student loans have balances north of $50,000 while many others with advanced degrees have student loan balances in the six figures
- It will take them mega years to pay their student loans
- Unfortunately, student loan payments are treated the same as any monthly credit payment for anyone who is applying for a residential mortgage loan
- Student Loans will be used as part of their debt to income calculation
- Deferred student loans for 12 months and longer is no longer exempt with FHA, USDA, and Conventional Loans
- However, deferred student loans that are deferred more than 12 months are exempt on VA Loans
Student Loan Payments Reported On Credit Reports
For those who carry student loans, their student loan payments are reported to all three credit reporting agencies.
- One great advantage with VA Loans is that as long as the student loans are deferred for at least 12 months, it is exempt from debt to income ratio calculations
- Any student loan that is deferred for at least a year or more can be excluded in mortgage qualification purposes on VA Home Loans
- This is not the case with FHA, USDA, and Conventional Loans
Alternative Monthly Student Loan Payment In Lieu Of 1.0% Of Student Loan Balance
Lenders will take 1.0% of the student loan balance and use that as a monthly debt and use it to calculate borrowers debt to income ratio.
- The second option is to contact the student loan provider and tell them the following:
- I am applying for a MORTGAGE. My lender needs a fully amortized monthly payment on an extended payment plan (which is normally 300 months/25 years)
This figure normally turns out to be 0.50% of the student loan balance. This figure can be used in lieu of the 1.0% student loan balance.
Student Loans: Case Study
Most people take out a student loan so they can better themselves by getting a degree from a college, university, or technical school. Statistics prove that the more education a person has, the higher paying job they can land.
Here is a case scenario:
- A person gets student loans in order to attend college with plans of graduating with a degree
- They take out a total student loan amount of $50,000
- Graduates with a degree and lands an above average paying job
- He wants to purchase a home
- Contacts a mortgage lender to get pre-approved
- The student loan information surfaces on his credit report but the student loan payment is in arrears and in collection
- Home buyer offers to get student loan current so he can qualify for a home
- No can do
A person who has federal student loan in collections or are in arrears in his or her payments, cannot qualify for a government mortgage loan until the student loan is in good standings.
- The federal student loan needs to be out of collections and assigned to a student loan provider and be in current standings
- Federal student loans cannot be included in bankruptcy filings and cannot be discharged
- All federal student loans are government loans and need to be paid
As mentioned earlier, in the event the student loan has been in deferment for 12 or more months, the Federal Housing Administration no longer allows the student loan monthly payment to be excluded in income qualification.
- Income Based Repayment (IBR) is no longer acceptable on FHA Loans and Conventional Loans
- As mentioned earlier, for mortgage borrowers with higher student loan balances which are in deferment, contact the student loan provider and get a fully amortized monthly payment over an extended term (which is normally 25 years)
- The fully amortized monthly payment can be used in lieu of the 1.0% of the student loan balance
- Borrowers do not have to change their student loan payment structure and can still leave it in deferment
- We just need a what if case scenario in writing
- The Gustan Cho Team at USA Mortgage can help borrowers with getting this monthly amortized payment with doing a three way conference call with the student loan provider
- The Gustan Cho Team at USA Mortgage is a direct lender with no lender overlays on government and conventional loans
All of our pre-approvals are fully underwritten and signed off by our mortgage underwriters. We close 100% of our pre-approvals because our pre-approvals are full credit loan approvals/loan commitments.
This is a huge benefit for those with higher debt to income ratios.